Beleaguered video camera manufacturer GoPro Inc (NASDAQ:GPRO) is slated to debut the Hero5 camera and Karma Drone on Sept. 19, just in time ahead of the upcoming holiday season. GPRO recently told the world as much on its Twitter account, where it also offered a brief teaser video of Karma. Although both have significance in GPRO’s future, the investing world is caught up on the Karma drone because it will answer whether GoPro stock can reverse its fortunes.
GPRO stock is on the ropes and seriously bleeding (down 18% year-to-date), but Karma could change things for the better.
The eponymous Karma is understandably steeped in an aura of mystique, since we already know how a Hero5 is likely to look like (hint: not much different from Hero4) but are basically clueless about the drone.
Is the Karma Drone GPRO’s Comeback Play?
Everybody loves a good turnaround story, and few are likely to be as dramatic as GoPro’s. However, engineering a turnaround for GoPro stock will not be a walk in the park.
GoPro launched a $5,000 360-degree camera dubbed Omni in mid-August. One month later, GPRO stock tanked almost 18%, giving back a good chunk of the 60% gains it had racked up over the prior three-month period. Omni is a pretty impressive immersive video camera that’s capable of doing amazing things like capturing high-quality 8K videos, something that few high-end VR systems can pull off.
But the market has unfortunately remained tone-deaf to Omni’s launch because the market for high-end 360-degree cameras is ostensibly too tiny to make a real impact on GoPro’s financials. For a new product to reverse GPRO’s fortunes, it will have to be a mass-market consumer offering with strong potential to tip the scales for the company.
Hero5 partly meets those criteria. But the fact that the new camera is likely to be a Hero4 look-alike may not inspire a lot of investor confidence. GoPro’s management appears to have been blindsided by the events during the launch of Hero4, and had to cut the price of the camera twice to just 50% of the introductory price. Until investors get the first sales reports for Hero5, you can expect the skepticism surrounding GPRO’s cameras to remain largely unchanged, which will do nothing for GoPro stock.
Luckily for GPRO, Karma is completely new off the blocks with an untainted history. Although GoPro has never given us a full glimpse of the quadcopter drone, the impressive maneuverability displayed in the company’s teaser videos suggests that the drone will be quite small with exceptional control capabilities. This may become one of Karma’s key selling points, as it tries to compete with bigger and bulkier drones by the likes of DJI, AeroVironment, Inc. (NASDAQ:AVAV) and 3D Robotics.
Also, given that GPRO just released its first 360-degree video camera, it won’t come as a surprise if Karma too comes equipped with full VR capabilities, something that would help give it a nice competitive edge.
But investors are ultimately more interested in whether Karma has the potential to move the needle for GoPro. The drone market is heavily fragmented, with only one player — China’s DJI — reputed to have a market share greater than 10%. About 43% of drones in the U.S. that have been granted Section 333 Exemption — this allows them to operate commercially — are DJI drones. AeroVironment comes in a distant second with 9% market share.
Goldman Sachs reckons that DJI owns 70% of the commercial drone market that was pegged at $1.4 billion in 2015, but is expected to expand to $4.8 billion by 2017. This estimate does not appear like a stretch when you consider DJI drone sales doubled from $500 million in 2014 to $1 billion in 2015. PwC is even more sanguine about the future of the drone and expects the global market to balloon to $127 billion by 2020.
The firm says that the cost of drone technology is quickly falling, thus making it possible for the devices to be deployed in everyday applications, including capturing aerial footage of weddings, family activities and sports.
In other words, Karma is coming to a highly competitive but fast-growing market. GoPro has the advantage of powerful brand recognition and it will have good cross-selling opportunities for Karma. Several drone manufacturers have signed contracts with GPRO and bundle their drone offerings with GoPro’s cameras.
GPRO is likely to undercut them in pricing by bundling Karma with its own cameras. GoPro owns ~22% of the action video camera market. I expect the company to capture 10% drone market share within the first two years and gradually grow it to around 20% over the next three years. That translates to $480 million in incremental revenue for the company, or about 34% of GoPro’s expected FY16 revenue.
That could be enough to reverse the fortunes of GoPro stock which is down 60% over the last 52 weeks.
Bottom Line On GoPro Stock
The best part thing about Karma is that unlike Hero5, which is likely to cannibalize older camera sales, the drone is actually likely to drive more sales for GoPro’s high-end cameras. It might be a good idea to pick up the battered GPRO stock now and ride the rally after the launch of Karma and Hero5.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
